When Eager Lenders Meet Eager Borrowers

Banking reform and consumer spending keep Korea growing

It's a brave time to be buying a new home in South Korea, whose export-reliant economy has been battered by the U.S. recession. Yet Chin Byung Hoon, a marketing director at a Korean fund management company, didn't hesitate to pay $180,000 for a parcel of land outside Seoul that became available in October. He plans to build a new home on the property. The incentive: a 6.35% mortgage from Shinhan Bank, the lowest rate in decades. "We might have made more money by investing in stocks," he says. "But we can't miss this chance to own a house in the suburbs."

Consumers such as Chin are a big reason Korea's economy is one of the few in Asia that is still growing. Even though Korea's exports plunged 5.5% in the third quarter, its economy is on track to expand by 2.5% this year. That's far off the torrid 8.8% pace of 2000--but much better than most economists forecast. Taiwan and Singapore, which also depend heavily on electronics exports, are suffering their steepest contractions in decades. Powering Korea's growth are a 3.4% jump in household spending and a 16.4% surge in residential construction.

GOOD DEALS. Much of the Korean economy's buoyancy can be traced to the effects of banking reforms since Korea's 1997 financial crisis. The government has forced banks that once funneled most loans to expansion-obsessed conglomerates, or chaebol, to sharply curtail credit to companies with debt loads of two times their equity. Now, few chaebol qualify as good credit risks. What's more, Seoul has spent $115 billion since 1998 on recapitalizing banks and buying out bad loans. The result: Well-capitalized banks have greatly expanded consumer credit, which has risen from 28% of loans in 1998 to 39% now. This in a country where home and car loans once were rare. Suddenly, "households have a lot of room to borrow money," says Rhee Namuh, research director at Samsung Securities Co.

Lower rates on bank deposits also are pushing money into the economy. During Korea's industrial takeoff between 1985 and 1995, savings were 35% to 40% of gross domestic product. Most of that was stashed in banks, which three years ago paid double-digit rates. Now, rates on one- to three-year time deposits are 4% to 5%.

Housing thus has become a more attractive investment. Growing demand pushed real estate prices up 8.6% in the first 10 months of this year. Rents have risen 50% in the past three years, and despite a construction binge, supply should remain tight until mid-2002. In response to the shortage, many homeowners are becoming landlords. The rent for a four-bedroom, 1,500-square-foot flat in Seoul's popular Kangnam district is about $2,600 per month. By paying $430,000 to buy that flat and rent it out, an investor can net more than 7% annually. Chin, for one, plans to keep his Seoul flat and rent it, which will earn him enough to make the mortgage payments on his new home in the suburbs with a bit left over.

CARS AND CLOTHES. As property values rise, consumers also are spending more. Although imports of capital goods used by factories have fallen, imports of cars, brand-name clothing, and other consumer goods are up. Hyundai Motors' car sales rose 8.1% in the first 10 months of 2001, and telecommunications services grew by 13.4% in the third quarter. A property bubble in the making? Not yet: Home prices are still below their 1997 peaks.

Greater access to consumer credit and lower bank rates also have led to the decline of some onerous housing practices. Rather than charge monthly rent, most landlords used to require tenants to put up huge cash deposits, often hundreds of thousands of dollars. Landlords parked this sum in the bank and lived off the interest, typically 1% per month. Or they used the money to fund their own businesses. Now landlords can get small-business loans and no longer need to gouge tenants.

Korea may not be entirely out of the financial woods. But the end of consumer-unfriendly housing practices, like the decline of chaebol and crony-infested banks, is another sign that the bad old days of Korea Inc. are fading.

By Moon Ihlwan in Seoul

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